Sensex slumps over 2 pct as monsoon forecast knocks rate cut hopes

MUMBAI (Reuters) - The BSE Sensex and Nifty lost over two percent on Tuesday and the benchmark 10-year bond yield jumped as a forecast for weak monsoon rains raised doubts over whether the central bank could follow up Tuesday's interest rate cut with another this year.

The Reserve Bank of India cut its policy repo rate by 25 basis points to 7.25 percent, as widely expected.

The RBI's statement, however, signalled caution about inflation risks if monsoon rains disappoint, while the government released a forecast that raised fears of a possible drought.

The Sensex closed 2.4 percent weaker, and the Nifty closed 2.3 percent down.

The benchmark 10-year bond was up 9 basis points at 7.91 percent, after earlier hitting a two-week high of 7.93 percent.

The new 10-year bond yield was up 7 basis points at 7.71 percent.

"The rise in yields shows that rate cut expectations are getting more delayed," said Harish Agarwal, fixed income trader, First Rand Bank in Mumbai

Both the Sensex and the Nifty closed 2.4 percent.

Meanwhile, the rupee weakened to 63.90/91 per dollar from Monday's close at 63.72/73.

Sentiment was also hurt by lack of any fresh measures to free up cash-strapped commercial banks' liquidity, which bankers had said were needed for them to lower lending rates further and pass on the benefits of monetary easing to the broader economy.

The Bank Nifty was down 3.3 percent.

(Reporting by Himank Sharma and Neha Dasgupta; Editing by Simon Cameron-Moore)